When economic conditions are uncertain, investors sometimes turn to one of the oldest mediums of trade -- gold -- to hedge their investments. Gold is a tangible investment and can be bought in small units, such as coins or ingots. But gold doesn't pay interest or dividends, it's not guaranteed that its market value will increase and it can be expensive to store in a safe place. By investing in a gold or precious metals mutual fund, you can gain exposure to gold but also benefit from potential dividend payments as well as potential capital appreciation.
Determine what you want your gold mutual fund to do for you. Your objectives might range from capital preservation to current income. Like other types of mutual funds, gold and precious metals mutual funds have different investment objectives and management styles. For example, some gold-oriented mutual funds attempt to act as a hedge against inflation by holding a larger percentage of their assets in the metal. Other funds seek to create capital appreciation by investing more heavily in the stocks of gold mining companies. If you are looking for a pure play on gold bullion, you might be better off investing in a gold exchange-traded fund that tracks the price of gold on the world market.
Request a prospectus from each gold mutual fund company you are considering, and read it carefully. The prospectus includes valuable information about the fund's holdings that can help you assess the fund's risks. Consider the geographic locations where the fund has investments. Gold and other precious metal mines are scattered throughout the world, and many are located in remote or politically unstable regions. Factors that affect the companies in a mutual fund's portfolio will affect the fund's performance. Note the companies that make up the bulk of the fund's investments. Research those companies to determine how much exposure each has to gold or gold mining operations.
Make your investment, then keep your eyes on the gold market. While gold is commonly thought to be a hedge against inflation, the demand for gold does not always track with rises in the cost of living. Changes in the price of gold tend to have a more dramatic effect on gold mining stocks than on pure investments in the metal. If your gold mutual fund is heavily invested in mining stocks, even minor changes in the price of gold can significantly impact the price of your gold mutual fund shares.
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